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Supporters of replacing part or all of Social
Security with private accounts have argued that Hispanics receive relatively
little for their payroll tax contributions to Social Security and would fare
better under a system of private accounts. In fact, the opposite is the
case. Research by government agencies and respected private institutions
shows that:

Hispanics receive more in Social Security benefits for each
dollar they pay into the system than either non-Hispanic whites or blacks.

Elderly Hispanics rely more on Social Security than does the
elderly population as a whole. Without Social Security, over half of elderly
Hispanics would live in poverty. Thanks to Social Security, less than a fifth
do.

Young Hispanics tend to have fewer assets, and are less likely
to participate in an employment-based retirement plan, than other young
people. Thus, while young Hispanics will likely be more prosperous than their
parents, they too will need Social Security’s retirement benefits (as well as
its disability and survivors benefits).

The President’s Social Security plan, which reduces the
program’s funding shortfall entirely through benefit cuts that slice deep into
the benefits of middle-class retirees, would harm Hispanics. Hispanics would
be better off under plans that employ a balanced mix of benefit reductions and
progressive revenue changes. Simply stated, Hispanics would be harmed
disproportionately if large cuts are made in a system from which they
disproportionately benefit.

Also, the President’s plan places the burden of reducing the shortfall
almost entirely on younger workers and future generations. This would
disproportionately harm Hispanics because the Hispanic population is
overwhelmingly young.

Social Security solvency can be restored in
ways that do not seriously threaten the benefits Hispanics receive from the
program. These reforms can be combined with adjustments, such as a meaningful
minimum benefit for low-income retirees, that would be of particular help to
Hispanics.

Hispanics Receive a Higher Rate of Return in Social
Security

Social Security disproportionately benefits
certain categories of people: people with lower incomes (because Social
Security is designed to replace a larger share of pre-retirement income for
those with low lifetime earnings than for those with high lifetime earnings);
people who live longer (because they collect benefits for more years than
those with average or below-average life spans); people who become disabled
(because Social Security includes disability benefits for them and their
families) and people with more children (because Social Security provides
benefits to the minor children of retired, deceased, and disabled workers).
All four of these characteristics are more commonly found among
Hispanics than among other groups.

As a result, every reputable study, including
those by the Government Accountability Office (GAO), economists at the Social
Security Administration (SSA) and the Urban Institute, and other researchers,
finds that Hispanics receive a higher average rate of return on their Social
Security contributions than the rest of the population. For example, studies
by Harvard economists Jeffrey Liebman and Martin Feldstein found that
Hispanics’ rate of return is about 35 to 60 percent higher than for the
population as a whole. As one study stated, in Social Security, “Hispanics
have returns and transfers that are significantly above those for whites and
blacks.”

A 1998 Heritage Foundation report, in
contrast, claimed that Hispanics’ rate of return in Social Security was so low
that they would do much better if the entire program were replaced with a
system of private accounts. However, the Heritage report has been widely
discredited; its many critics include SSA’s highly respected chief actuary
Stephen Goss and former SSA chief actuary Robert Myers, who for decades was
the leading adviser on Social Security to congressional Republicans. Further,
as Goss noted in an official memorandum from the actuaries, even “by
[Heritage’s] own calculations…Hispanic Americans would be expected to receive
a substantially higher rate of return from Social Security than would the
general population, on average.”

Hispanics do better than other groups in
Social Security because the program disproportionately benefits people with
low incomes, higher-than-average disability rates, more children per family,
and long lives — all of which characterize Hispanics. If Social Security were
entirely replaced with private accounts, these elements of the program would
disappear, and each worker’s benefits would be tied directly to his or her
earnings. That would be harmful to Hispanics.

Elderly Hispanics Rely on Social Security — and
Younger Hispanics Will Too

Some 1.2 million elderly Hispanics receive
Social Security benefits. Those benefits reduce the poverty rate among
elderly Hispanics by nearly two-thirds, from 51 percent to 18 percent.

Social Security’s anti-poverty effects are roughly similar across the Hispanic
community, irrespective of country of origin, as the table shows.

Social Security provides a larger share of
the retirement income of elderly Hispanics than for the elderly population as
a whole, since elderly Hispanics receive a relatively small share of their
income from pensions and retirement savings. Fifty-one percent of elderly
Hispanic beneficiaries rely on their Social Security checks for 90 percent or
more of their income.

Figure 1

Social Security’s Poverty-Reducing Effects
Among Hispanics 65 and Over, 2002

Country of Origin

Poverty Rate Without Social Security

Poverty Rate with Social Security

All Hispanic

50.7%

17.9%

Mexican

51.6%

20.1%

Cuban

53.7%

15.0%

Central/South American

42.3%

12.4%

Puerto Rican

50.9%

16.3%

Source: CBPP tabulations of March 2003 Current Population Survey data.

Figure 2

Social Security is also particularly
important for the retirement security of today’s young Hispanic workers. One
reason is that Hispanic workers are far less likely than whites or blacks to
participate in employer-sponsored retirement plans. In 2003, only 29 percent
of Hispanic workers aged 21-64 participated in an employer-sponsored
retirement plan, compared to 53 percent of white workers and 45 percent of
black workers, according to a study by the Employee Benefit Research
Institute. In addition, Hispanic participation in these plans has actually
fallen slightly since 1987 (the first year for which the EBRI report provides
data), while white and black participation has increased.

Given this large and growing gap in
retirement plan participation, it seems likely that future Hispanic retirees
will also rely more heavily on Social Security than the rest of the
population.

The President’s Plan Would Disproportionately Harm
Hispanics

Since Hispanics gain more from Social
Security benefits than other groups do, they are likely to do worse under
reform plans that rely solely on benefit cuts to reduce the Social Security
shortfall than under plans that employ a balanced mix of benefit reductions
and progressive revenue changes.

Also, since Hispanics are an overwhelmingly
young population, they are likely to do worse under plans that make young
workers and future generations bear most of the sacrifices to preserve Social
Security. (Only five percent of Hispanics are aged 65 or older today,
compared to 12 percent of the U.S. population as a whole. By 2050, 15 percent
of Hispanics will be aged 65 or older.)

The President’s Social Security proposals
fare poorly on both of these counts:

The President’s plan relies entirely on benefit cuts to
reduce the Social Security shortfall. The President’s “sliding scale
benefit reductions” would reduce benefits for all workers who earn more than
about $20,000 today; roughly seven of every ten workers would be affected.
The benefit cuts would grow sharply as income rose above $20,000. For a
worker earning the equivalent of $37,000 today who retires in 2045, benefits
would be cut by about $3,300 a year. If this worker earned the equivalent of
$59,000 today, the benefit cut would be about $6,400 a year. (For workers who
retire in years after 2045, the benefit cuts would be even steeper, as
explained below.) Also, any worker who chose to create a private account
would experience a second benefit cut.

The pain of these benefit cuts
would be much sharper for the middle class than for high-income individuals,
since middle-income Americans rely on Social Security to replace a much larger
share of their pre-retirement income than wealthy individuals do. Moreover,
these benefit cuts would close only about 59 percent of the 75-year Social
Security shortfall, as measured by the Social Security Trustees. Thus, the
Administration may eventually endorse deeper cuts than those shown here.

The
President’s plan spares older workers and current retirees from significant
benefit reductions and makes later generations bear much steeper cuts as a
result. The President’s plan exempts those aged 55 or older from any
benefit cuts. For workers below that cutoff, the cuts would start small but
grow for each new group of retirees.

This generational imbalance is
exacerbated by the fact that the plan calls for the government to borrow
trillions of dollars to create a system of private accounts. That would
greatly increase the debt burden on younger generations. As economist
Lawrence Kotlikoff, a supporter of private accounts, writes, “the dirty little
secret underlying most Social Security privatization schemes is that they head
precisely down this road” of “dumping the entire…bill in our kids’ laps.”
Since a large share of Hispanics are young and would be forced to pay that
bill, such a move is not in Hispanics’ interest.

To its credit,
the President’s plan would exempt many poor workers from benefit cuts. The
President’s plan also would enhance the minimum benefit for some low-income
workers (although it is unclear whether the proposed minimum benefit would
endure or would phase out over several decades). Nonetheless, middle-income
Hispanic workers would face sharp benefit reductions in retirement, and
Hispanics as a whole would fare worse under the President’s plan than under
plans that combine much more modest benefit cuts with progressive revenue
enhancements.

Strengthening Hispanics’ Retirement Security

Hispanics’ retirement security needs to be
strengthened. The President’s proposal to scale back Social Security
substantially would have the opposite effect, as Social Security is the one
form of retirement security that now works well for Hispanics. Hispanics
generally would fare better under Social Security solvency plans that impose
smaller benefit cuts on middle-income workers and ask workers with very high
incomes to shoulder more of the load. That could be done through progressive
revenue changes, such as the following:

The estate tax, which Congress is considering repealing
permanently, could be scaled back and retained, and its revenues dedicated to
Social Security. Retaining the tax at its 2009 level, with a $3.5 million
exemption per individual ($7 million per couple) and a top rate of 45 percent,
would preserve enough revenue to close about 30 percent of the Social Security
shortfall over the next 75 years, according to the Social Security
Administration’s chief actuary. Moreover, at that exemption level, only the wealthiest three of every 1,000 people who die would
owe any estate tax as of 2011, according to the Brookings-Urban Tax
Policy Center. The fraction of Hispanics subject to the tax would be even
more miniscule, given their lower wealth levels.

Many have suggested raising the maximum level of wages and
salaries subject to the Social Security payroll tax, now set at $90,000.
Alternatively, economists Peter Diamond and Peter Orszag have suggested
imposing a modest (three to four percent) surcharge on earnings above $90,000
and devoting those revenues to Social Security. Either measure would raise
substantial revenues but affect only about six percent of all workers — and
two percent of Hispanic workers.

In addition, a meaningful minimum benefit
should be established in Social Security to ensure that beneficiaries do not
live in poverty, and attention should be given to the fact that some legal
immigrants are not eligible for retirement benefits from Social Security
because they have not worked in the country for at least ten years. (To be
eligible based on fewer years of work, an individual’s country of origin must
have a “totalization” agreement with the United States.) In a recent report,
the National Council of La Raza called for action on both of these issues.

Hispanics also should be given incentives to
save more for retirement. The existing tax incentives for retirement saving
give their biggest benefits to the people who least need them:
high-income households, who already are much better prepared for retirement
than people who are less well off. Economist Peter Orszag, director of the
Brookings Institution’s Retirement Security Project, has proposed a series of
policy changes that would improve retirement security among low- and
middle-income families. Such reforms would be especially beneficial for
Hispanics.

These reforms include: making enrollment in
401(k)-type retirement plans automatic unless employees opt out of the plan;
expanding the current saver’s credit, which provides a tax subsidy to
moderate- and lower-income families who contribute to a retirement account;
changing rules in programs like food stamps and Medicaid so families are not
disqualified for those benefits simply because they have modest retirement
savings; and allowing workers to deposit part of their tax refund directly
into a retirement account while preserving the rest for other purposes. Such
steps would help build retirement security for Hispanics and for Americans as
a whole.

[2]
Fernando Torres-Gil is Director of the UCLA Center for Policy Research on
Aging and acting dean of the UCLA School of Public Affairs. Robert
Greenstein is executive director, and David Kamin is a research assistant,
at the Center on Budget and Policy Priorities.